When buying or selling a business, there are numerous tax opportunities as well as potential tax pitfalls. Not planning ahead or ignoring tax implications can end up being an expensive slip-up.
When a business owner decides to sell their company, they must consider the taxes that they’ll have to pay as a result. Selling a company is like any other transaction that creates profit and as a result, taxes are likely to be payable. When shares in a company are sold for more than their original cost, a capital gain will arise. Capital gains are subject to capital gains tax (CGT).
The amount of tax you pay will depend on whether any tax reliefs or reductions are available. It’s important to make sure you consult with a tax advisor pre-sale to minimise the amount of tax payable and ensure the sale is structured in a tax efficient way.
Some of the CGT reliefs you may need to consider on a sale are Entrepreneurs’ Relief and holdover relief.
If the qualifying conditions for entrepreneurs’ relief are met, CGT will be charged at 10% on the first £10 million of gains you realise during your lifetime. Any gains above the £10 million threshold are taxed at the higher CGT rate of 20%.
It’s important to note that entrepreneurs’ relief is only available to individuals who have met the qualifying conditions for at least 2 years ending on the date of disposal. For disposals that took place prior to 29 October 2018, the qualifying conditions only had to be met for a period of 12 months ending on the date of disposal.
Holdover relief can be claimed if you give away your business rather than selling it, for example, if you gift company shares to your children. The effect of holdover relief is that no capital gain arises on the disposal and the individual receiving the shares is deemed to acquire them at a cost equal to the transferor’s base cost. The relief essentially defers the capital gain until the gifted shares are disposed of in the future.
Overall, the best strategy is to contact a tax expert before the sales process begins. This way sellers can minimise their tax liabilities, allowing them to retain more of their sales proceeds.
The sale of your business is also the ideal opportunity to consider your inheritance tax position. In most cases the company shares will qualify for relief from inheritance tax whereas any cash received will be chargeable to inheritance tax, thereby increasing your overall inheritance tax exposure. We can provide combined advice on both the business sale and your inheritance tax position.
If you’d like to speak with an advisor about business sale or buying, please fill in the form below.